Ginnie Mae Plans Take Aim At a New Foe in FHA Loans

SAN DIEGO - Ginnie Mae announced a package of initiatives this week to improve liquidity and pricing of its mortgage-backed securities - including a plan to start buying the bonds itself.

Giving its securities a market boost would help Ginnie compete with the Federal Home Loan banks, its new rival in the FHA loan market. The banks' Mortgage Partnership Finance program has bought up a substantial portion of FHA loans, a market that Ginnie Mae has been accustomed to dominating. Some have estimated that the Home Loan banks could take away 30% to 40% of Ginnie's FHA loan volume.

Speaking at the Mortgage Bankers Association conference here this week, George S. Anderson, executive vice president at Ginnie, said the government's charter allows it to buy its own mortgage-backed bonds. The agency was created in 1968 in the same legislative package that privatized Fannie Mae. Mr. Anderson said Fannie and Ginnie have similar language in their charters about what they can do.

He added that since Fannie and Freddie Mac are allowed to buy their own securities, so should Ginnie. However, the charter specifies that Ginnie must first get approval from the Treasury to do so. Mr. Anderson said Ginnie never bought its own securities before because it never needed to, but the recent entry of the Home Loan banks into the FHA market has made such a program necessary.

Much of the loans Ginnie lost to the Home Loan banks were odd-coupon loans, which are used to back securities issued under the Ginnie II program. Odd-coupon loans have interest rates that do not fall on a half-point or a whole point, which makes their prepayment speeds harder to predict.

Ginnie II securities trade at a significant discount to securities issued under the more popular Ginnie I program. Consequently, originators do not get good prices for odd-coupon loans from Ginnie.

The agency, which is overseen by the U.S. Department of Housing and Urban Development, had earlier proposed to put odd-coupon loans in Ginnie I pools, but investors and bond dealers balked at the idea.

Wall Street was more receptive to the plans Ginnie announced this week. "They're headed in the right direction with these proposals," said Arthur Frank, director of mortgage research at Nomura Securities International. "They will help get more investors involved in the market."

Mr. Frank said it is a good idea for Ginnie to step in and buy Ginnie II's to boost prices when they are sagging.

Ginnie said it plans to tighten the maximum spread between the coupons on Ginnie II securities and the interest rates on the underlying loans to between 50 and 87.5 basis points; the current spread is 150 basis points.

That would mean that to back an 8% security, for example, Ginnie would be able to use loans with rates no higher 8.875%; right now the loans can go up to 9.50% to qualify for the same pool. The tighter rate range would make it easier to predict the pools' prepayment speed, so investors would be willing to pay more for the securities. This would translate into higher prices to originators for odd-coupon loans.

Another move Ginnie is floating to raise the prices for Ginnie II's is to change the payment date to the 15th of the month, the same date for Ginnie I's. Ginnie II bondholders currently receive payments on the 20th. Changing the payment date would make investors willing to pay more for Ginnie II bonds because they would get their money five days earlier.

Mr. Anderson also said Ginnie plans to use the Federal Reserve to clear trades of all its mortgage-backed securities to make the bonds more attractive to overseas investors. Such investors are unfamiliar with the Depository Trust Co., which currently handles clearing of Ginnie's bonds, but very familiar with the Fed, which handles the clearing of U.S. Treasury securities, Mr. Anderson said.

With the supply of Treasury bonds being reduced, Ginnie could pitch its mortgage-backed securities - which are backed by the full faith and credit of the U.S. government - as an alternative for international investors.

Mr. Anderson said the Fed clearing plan could be up and running by the end of the summer and that he would like the mortgage securities investment program to be in place by yearend at the latest. He said Ginnie and the Bond Market Association plan to talk with investors this month about the other proposals.